Is Samsung’s massive $26 billion semiconductor capex only delaying China’s push into the memory device market? While it’s not likely to halt China’s inevitable drive into the DRAM and NAND flash markets despite technology challenges, it may wield a bigger influence on its competitors’ capex plans as Samsung protects its leadership position. For buyers, it could mean lower pricing for 3D NAND as the industry enters a period of oversupply.
While China has the capital to invest in production capacity, there is no way China can make technological inroads into the memory market without a joint venture or partnership, according to industry watchers.
IC Insights has been skeptical about Chinese startups having the ability to compete with the memory device market leaders – Samsung, SK Hynix and Micron – even before Samsung announced its capex plans.
“The Chinese may be able to afford a great deal of capacity, but I don't see them competing with the major suppliers on technology over the next five to 10 years,” said Bill McLean, president of IC Insights.
Samsung’s capex spending levels will put a stop to “any hopes that Chinese companies may have of becoming significant players in the 3D NAND flash or DRAM markets,” and “just about guarantees that without some type of joint venture with a large existing memory suppler, new Chinese memory startups stand little chance of competing on the same level as today’s leading suppliers,” said McLean.
“Even before Samsung's capex surge this year, it was our opinion that without a joint venture agreement with one of the major memory suppliers, there was almost no chance of China's memory suppliers competing on technology,” he added.
“All you need to do is look at a company like SMIC, China's largest indigenous foundry,” McLean told EPSNews. “They have been in business for about 15 years and are just starting to have significant production of 28-nm devices. Currently, they are about five generations behind TSMC in technology. If SMIC can't compete on technology with the foundry leaders after 15 years in business, why would anyone think it would be different for memory?”
“Even if they were to develop advanced technology on their own, the new Chinese suppliers would almost certainly infringe upon numerous DRAM and NAND patents held by Samsung, SK Hynix, Micron, etc.,” McLean said.
Avril Wu, DRAMeXchange’s research director, can’t say it is “entirely impossible” for Chinese startups in the memory market to compete on the same level as the big players, “but it is going to be considerably difficult and time consuming for smaller companies to start from scratch without help (especially in terms of DRAM design).”
Wu noted that “Chinese startups have made ‘some’ progress on 3D NAND development but there's not much on DRAM yet. Regarding the project design of DRAM and NAND, DRAM has a higher entry barrier by far. Therefore, without JV or partnerships, it is difficult for those parties to make a move on DRAM (legally).”
DRAMeXchange believes Samsung’s capacity expansion and technology migration will help the company maintain its technological lead for one or two years over its competitors, while certainly hindering Chinese DRAM and NAND Flash makers from catching up significantly.
“For the time being, Samsung is obviously more worried about potential NAND competition from China rather than DRAM (because it is hardly any competition for DRAM from China yet),” said Wu. “We believe Samsung is more concerned about strengthening its technical leadership in the global market.”
Wu previously noted that China’s memory industry is expected to enter its formative stage of development in 2018. “To forestall Chinese DRAM and NAND Flash makers from catching up significantly, Samsung could raise its production capacities for these products and engage in aggressive pricing. Potential market entrants will not be able to expand their production capacities and improve their technologies on schedule if they are under heavy financial pressure.”
However, it’s not likely to halt China’s domestic IC production plans, particularly for memory devices and processors.
“Developments in China’s IC industry is driven by import substitution demand, government policies, major funding sources and innovative applications for semiconductor technologies,” said Jeter Teo, research director of TrendForce, in a statement. “Currently, key products in China’s IC market such as processors and memory components are still imported from overseas. China in fact has imported more than RMB 1.4 trillion worth of IC products annually for four consecutive years, from 2012 to 2016. Therefore, increasing domestic IC production has become a critical mission for the Chinese government.”
Supply and Pricing
IC Insights recently revised its outlook for the semiconductor industry’s capital spending. The market researcher expects spending to grow 35 percent in 2017, reaching $90.8 billion. The big spender is Samsung. The electronics giant spent $11.3 billion in semiconductor capex last year and this year the semiconductor group expects to double its spending to $26 billion.
“In my 37 years of tracking the semiconductor industry, I have never seen such an aggressive ramp of semiconductor capital expenditures. The sheer magnitude of Samsung’s spending this year is unprecedented in the history of the semiconductor industry,” McLean said.
IC Insights estimates that Samsung’s semiconductor capex of $8.6 billion in 4Q 2017 will represent 33 percent of the $26.2 billion in total semiconductor industry capital spending, and account for about 16 percent of global semiconductor sales in the fourth quarter.
Here are IC Insights estimates for Samsung’s capex investments:
- 3D NAND flash: $14 billion (including an enormous ramp in capacity at its Pyeongtaek fab)
- DRAM: $7 billion (for process migration and additional capacity to make up for capacity loss due to migration)
- Foundry/Other: $5 billion (for ramping up 10nm process capacity)
In terms of what Samsung’s investments means to the industry, IC Insights expects it might mean a period of overcapacity in the 3D NAND flash market. But it’s not only related to Samsung’s spending. IC Insights believes it will cause competitors such as SK Hynix, Micron, Toshiba and Intel to increase their spending at some point to maintain market share.
Competitors increasing their capex to maintain market share is more likely to happen in a “perfect competitive market rather than an oligopoly. Therefore, we believe it is more likely to happen in NAND competition, but not DRAM,” said DRAMeXchange’s Wu.
“It is hard to predict to what extent Samsung’s action will have on future DRAM and NAND markets if we do not know the detailed plan of their spending in capex,” Wu noted. “For now, as far as we understand, most of the capex spending is for 3D NAND development which is the most critical concern for suppliers. Once 3D NAND is available for all the suppliers, it is likely that ASP will drop. However, NAND products have high price elasticity of demand, so lower prices will result in higher demand in the short term.”
For DRAM, if Samsung follows through with its capacity expansion, the company’s output for 2018 will increase by 80,000 to 100,000 wafers, according to Wu. This means Samsung’s total DRAM production capacity would increase from 390,000 wafers per month at the end of 2017 to nearly 500,000 wafers per month by the end of 2018. This will drive Samsung’s annual bit supply growth rate to 23 percent in 2018, up from the original forecast of 18 percent.